Home Insights US rents are falling and the reasons why could be good news for Aussies

US rents are falling and the reasons why could be good news for Aussies

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The Australian and US rental markets have been tough for tenants during the Covid pandemic.

But unlike here, the US market appears to be starting to cool, with rents advertised for September and October actually falling.

Are you going to see the same thing?

Finding an affordable rental is a daunting prospect for many.Photo: Getty

In 2021 and early 2022, the US and Australian rental markets looked about the same

Over the past few years, renters in Australia and the US have faced challenging market conditions.

Rents have surged in both counties for much of the pandemic, with the United States seeing an increase of about a quarter since early 2021 and Australia seeing an increase of about a sixth.

In both cases, this surge in rents means that the market very tight.

In both countries, vacancy rates have fallen dramatically, reaching very low levels. In other words, there were few rental properties available for tenants, and competition for specific properties was fierce.

The reasons for the decline in rental vacancies in both countries are complex, but the surge in household formation was a very important factor.

In 2020 and 2021, many rental sharehouses were dissolved and those people moved into smaller households. In particular, many chose to live alone.

The reasons why the renter made that move are complicated.

But part of the story is people wanted more space. Increase in insurance premiums for larger dwellings. In the rental market, they showed up as renters who wanted less roommates.

The shift to smaller households is a big part of why rental vacancies are falling and the rental market is so tight.

Smaller household size means more renters. household This means that the demand for rentals will increase.

A shortage of rental properties was also a problem in both countries, limiting or even reducing the number of properties available for rent.

The causes of supply restrictions were more diverse.

Australia saw many investors sell off from the rental market, while the US saw delays and disruptions in the construction industry limited the number of new homes Enter the rental market.

There are signs that things are changing in the US

Some of these forces are beginning to reverse in the United States.

Household formation in the United States has slowed significantly, even reversing this year. Compared to a year ago, the number of households is up by just 0.1% and is actually down from its peak in November 2021.

Slower household formation means less rental demand. Fewer households means less rental properties are needed to house them.

And we can see the impact of the slowdown in household formation. U.S. rental vacancies are on the rise, and the market isn’t as tight as it was in his 12 months.

It’s also impacting US rents.

Actual advertised rent in the US, depending on the scale you use fell September and October. Part of that is seasonal, with advertised rents in the US typically dropping for the winter, but the drop is greater than usual.

And when measuring year-over-year rent growth excluding these seasonal effects, rent growth has clearly slowed over the past six months.

In early 2022, rents increased at a pace of more than 15% year-on-year. Today that pace has slowed to 5% to 10% depending on the measurements used.

What does this mean for Australian renters?

While it is not clear that US rental conditions directly affect the Australian rental market, many of the trends and underlying causes are similar.

That means the US market could help us understand where the Australian market is headed.

Unlike the United States, Australia does not have timely measures for household formation. As such, it’s hard to know if the pandemic-era shift to smaller rental households is changing and reforming share houses.

However, it is likely that we will see a slowdown or reversal in household formation.

Many of the factors that have divided share houses apart, such as having to work and study at home and having to isolate, are being resolved.

And, importantly, rising rents have made it harder to rent smaller residences, where rents per bedroom are typically higher. This will encourage some renters to move back to larger shared houses, reversing some of the household composition seen during the pandemic.

A slowdown in household formation, as is happening in the US, will begin to moderate demand for renters. I haven’t seen one in Australia yet.

Vacancy rates are still declining, but trends in the Australian rental market have lagged the US throughout the pandemic.

If this delay continues, a cooling down in the US rental market could lead to the next shift in the Australian rental market.

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